New for 2013 – “In-Plan Roth Rollover”

For the past few years, plans with designated Roth accounts could allow an individual to roll over an amount from a non-Roth account into the individual’s designated Roth account in the same plan, but only amounts the individual could have had distributed from the plan, usually because the individual had attained age 59½ or had severed from employment.

On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012.  Among the provisions contained in this legislation is a further expansion of retirement plan participants’ ability to convert their pre-tax funds in a 401(k), 403(b), or governmental 457 plan into Roth post-tax funds through a taxable “In-Plan Roth Rollover.” 

Therefore, beginning in 2013, a 401(k) plan can permit this type of rollover for an amount that is not eligible for distribution at the time of the rollover, such as an amount in an individual’s regular (pre-tax) elective deferral account when the individual is not eligible for a distribution from that account.

What this really means – now any non-Roth money source regardless of whether it is “otherwise distributable” under a plan may be converted from a pre-tax amount to an after-tax Roth amount through a Roth In-Plan Rollover. These money sources generally may include vested: (1) pre-tax Code section 401(k) and Code section 403(b) deferrals, governmental Code section 457(b) deferrals, and earnings thereon, (2) matching contributions, and earnings thereon, (3) employer non-elective contributions, and earnings thereon, and (4) non-Roth after-tax contributions, and earnings thereon. Because of the expanded availability of a Roth In-Plan Rollover an active 401(k) or 403(b) plan participant who has not yet reached age 59½, or a governmental 457 plan participant who has not reached 70½, could elect to convert his or her plan funds, even though these amounts could not be currently distributed from the plan. Of course, because this is an elective plan feature, a plan sponsor may or may not wish to make this new tax treatment option available to its plan participants. In addition, plan sponsors need to ensure that there is conforming state or local enabling legislation that supports this feature.

The motivation behind expanding the availability of In-Plan Roth Rollovers to amounts in a plan not yet eligible for distribution stems from the potential for the government to generate additional tax revenue.  As Roth distributions are generally not subject to tax (provided they meet the specified qualifications), lawmakers anticipate that certain taxpayers will take advantage of the broadened In-Plan Roth Rollover feature to hedge against the potential for future tax rate increases.  Legislators estimate the new Roth provision will raise roughly $12 billion in additional federal income tax revenue over the next 10 years.